Smallcap Stocks Hit Hard by Earnings Misses and Sector Weakness in Q3 FY25

The smallcap index has fallen around 22% from its peak, worsened by a significant 17.9% YoY earnings drop in Q3. Midcaps and large caps showed resilience with positive growth, but small caps saw a major downturn, exacerbated by downgraded earnings expectations. Key sectors like cement, private banks, and consumer stocks have been impacted.

Earnings Downturn Hits Smallcaps Hard

The cracks in India’s smallcap rally have widened, and the recent Q3 earnings season has worsened the outlook. Following an initial surge that drew retail investors, the smallcap index has plunged 22% from its peak.

As per news reports, earnings for smallcap companies saw a sharp 17.9% decline year-on-year (YoY) during the 9M FY25 period, a significant contrast to the 8.4% growth observed in midcaps and the 2.6% increase seen in large caps.

The downward pressure remains strong as smallcap earnings saw substantial downgrades, with estimates cut by 5.9%, compared to midcaps (3.4%) and largecaps (1.2%).

Government Capex Slowdown Impacts Smallcap Earnings

A closer look at the profit after tax reveals that the Nifty Midcap 100 index led with the fastest YoY growth at 48%, followed by small caps at 16%, and large caps at 13%.

However, smallcap growth was heavily impacted by troubles in a few financial stocks. Excluding those, smallcap stocks saw a more robust growth of 29%.

A slowdown in government capex spending, particularly in the first half of FY25, has also affected the revenue of companies tied to sectors such as railways and defence, resulting in delayed earnings as order flow stagnated.

Widespread Earnings Pressure Across Key Sectors

The devastation in earnings is spread across multiple sectors, making a swift recovery increasingly unlikely.

The cement and building materials sector has faced severe cuts of 11%, while private banks, consumer stocks, and retail companies have also been hit hard, seeing earnings downgrades of 9% or more.

Additional weakness in automobiles and chemicals adds to the overall pessimism surrounding the smallcap space. Given the widespread pressure and the ongoing downturn, the smallcap recovery remains uncertain, and investors face heightened risks in this segment.

Conclusion

The smallcap space, once a promising area for investors, is now facing significant headwinds, with a sharp 22% fall from its peak and a 17.9% YoY decline in earnings for Q3.

With earnings downgrades, government capex slowdowns, and a lack of order flow in key sectors like railways and defence, the path to recovery for smallcap stocks remains uncertain.

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